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The Best & Worst Biofuel Startups

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Amid the rubble of the first generation of biofuel projects focused on ethanol derived from corn, a new landscape of biofuel tech has taken shape. As Lux Research puts it in a report released today, the companies range “from backyard brewers to billion-dollar industrial giants,” working in five key technology categories: fermentation, gasification, synthetic biology, chemical processes, and the political darling, algae. No single category offers a silver bullet for renewable fuels. Rather, Lux finds that each of the five categories “hosts promising producers and future failures.”

Given the amount of money pouring into these technologies from both public and private sources, how can we distinguish between the likely winners and losers? Based on factors like revenue per employee, patents, performance metrics, production capacity and other data, Lux has identified gaps between long-shot ventures that would make risky investments and weak partners, and companies with disruptive core technologies and other key characteristics that make them promising targets for mergers, acquisitions or licensing deals.

One thing’s clear from the analysis: While many startups generate buzz when they raise new funds, high profile investors hardly put them first in line for market viability. Lux offers a sobering statement for young fermentation ventures, including those working on cellulosic ethanol, butanol, propanol and methanol. Put simply, scale trumps tech (see our map of companies racing to build cellulosic ethanol plants in the U.S.):

“Right now, all of these companies are in a heated race to achieve that low cost [competitive with petroleum counterparts], which can only happen at commercial scale; companies that get there first — due to favorable funding, government assistance, or operational excellence — will have the best prospects even if their technology isn’t the absolute best in class.”

This puts Canada’s Iogen, backed by oil giant Shell in a strong position. Founded in 1974 and producing small amounts of cellulosic ethanol for the last six years at a demonstration plant in Ottawa, Iogen uses specialized enzymes to convert straw feedstock into sugars, which it then ferments and distills to make cellulosic ethanol.

But while Iogen earned top marks from Lux based partly on its age and maturity, Mascoma, at less than five years old, also scores well in Lux’s rubric, joining Iogen in achieving “top chef status.” Lux cites “strong financial support from investors” (who include a number of Silicon Valley venture firms, such as Khosla Ventures, Kleiner Perkins and VantagePoint Venture partners, as well as General Motors), and Mascoma’s “potentially cost-cutting” process for breaking down cellulose and fermenting the sugar with a single microbe.

Qteros, on the other hand, backed by billionaire investor George Soros, as well as BP, Valero and Venrock, has a tough climb ahead. Lux notes that although the startup, founded in 2006, “is young and still has opportunity to prove its mettle,” progress has been “steady but slow,” delivering only lab-scale production and lacking high-profile partners. The next two years, Lux predicts, “will decide the company’s fate.”

Other high-profile biofuel startups didn’t score quite as well as we would have expected. Government-backed Range Fuels, which is one of the companies closest to producing cellulosic ethanol commercially, garnered a “wait-and-see” rank, as did ZeaChem, Coskata, Ze-gen, Solix Biofuels and algae gorilla Sapphire Energy — reflecting “significant unknowns” about the companies’ tech or markets.

Algae technologies, given their very early stage, show the most variation of any other tech category. They still have plenty of skeptics, including aggressive cellulosic biofuels backer Vinod Khosla. Lux writes, however, that “While the majority of companies are still trying to decide upon end markets to pursue,” collaboration, cross-licensing and joint ventures between developers of algae tech tied to particular local conditions (deserts in the Southwest vs. salty inland lakes, for example) will deliver commercial success for some combination of today’s technologies.

Some of the strongest players in Lux’s ranking include Phycal, Algenol and Solazyme — a 7-year-old startup that had one of the first development deals with an oil company and expects to be able to commercialize its technology in the 2012-2013 time frame.

For genetic modification tech, energy and agricultural giants such as Shell (s RDS.A), Chevron (s CVX) and Monsanto (s MON) represent the most promising exit strategies for startups, according to Lux. “Though the production of energy crops for fuel is economically questionable, this family of technologies” can be used for agriculture, “a market that will never run dry.”

Image courtesy of Coskata.

12 Responses to “The Best & Worst Biofuel Startups”

  1. All those reviewed are North American-based technologies. Where do you see European Union, China, & South American Technology efficacy fit into this array?? As an example, Inbicon recently opened a 1.5Mgpy demonstration facility in Kalundborg, DK.

  2. This report is preposterous.

    How can revenue per employee be measured for pre-revenue start-ups? Did these companies volunteer this information? Most of these companies are less than 5 years old, but it takes a little over 3 years for a patent to be published. How can they know for sure how the real IP that such a young company has established? Exactly what “other data” was obtained? Was it willingly or legally obtained? Most start-ups don’t volunteer any of the really juicy details.

    How can “wait and see” be a category by itself? That seems to infer that they just don’t know what they’re talking about so they’ll group them as such. That along intimates that the rest of the report is equally uninformed.

    Further, each of those companies (Ze-gen, ZeaChem, Coskata, Solix) is less than 5 years old and have scaled pilot facilities in operation. They all have quality investors behind them. Why is Mascoma singled out?

    Further, quality investors is not a proxy for success. There are many determining factors for getting investment involvement, valuation not the least of them. It should be noted that even though Iogen was backed by Goldman and Shell, Shell and Goldman have both divested direct ownership of it (Shell’s share in Iogen was included in the recently announced JV with Cosan). So even though they had quality investors, they have, in the last six years (including years with available financing capital), failed to develop a commercial scale facility. That doesn’t speak well of the overall scalability and inherent economics of their technology (doesn’t make it a failure either). So why do they garner a ‘strong’ rating when their longer track record doesn’t include commercial success?

    This report doesn’t present any particular insights and probably should be disregarded altogether.

    • Thanks for your thoughtful comment, Max. I think we have some common ground here. You’re right that there are many determining factors for investors and that ranking early-stage, private companies is a difficult task. And as I’ve mentioned in the post, there’s a whole lot more to market viability than high profile backers.

      To your comment that many of these companies are less than five years old, I should note the report focused primarily on young startups. It seems fair to say there’s some degree of “wait and see” for any startup in this sector. In this report from Lux, the companies marked as “wait and see” also fell into other categories on a grid based on a set of weighted criteria. Clearly I wouldn’t disregard the report altogether — it serves at the very least as a starting point for discussing what really makes for a strong biofuel startup.

      • Josie – A conclusion of ‘wait and see’ for young start-ups appears redundant, (it’s like saying we should ‘wait and see’ who is first place in the AL-East come June). This report’s methodology seems inconsistent enough to invite scrutiny. I would have appreciated this blog post more if it had provided such scrutiny instead of articulating a synopsis that, at best, serves as a sales pitch for its purchase.